Half of alternative fund managers say the Alternative Investment Fund Managers Directive is still a source of uncertainty and they fear the consequences of non-compliance, writes Hani Kablawi at BNY Mellon.
The Alternative Investment Fund Managers Directive (AIFMD) has become a reality as the start date for authorisation passed on July 22. Marking the latest in a slew of regulatory reforms facing the alternative investment funds sector and the asset management industry more broadly, we collectively have 12 months to fall into line with the new requirements. How well prepared are we at the start of this journey and what are our thoughts on where we will end up?
Much has been written on the subject, yet a survey conducted by BNY Mellon suggests half of those surveyed believe uncertainty lingers within their organisation. Half of those surveyed believe their organisation will be disadvantaged in some way by the AIFMD and a third are fearful of complying on time and of negative financial implications.
The survey, conducted to mark the start of the implementation, included companies from Europe, Asia, the US and Latin America with an accumulated total of over $5 trillion (€3.7 trillion) of assets under management
Now with less than one year to go until full compliance is required, readiness remains the key challenge and one which the industry is some way off fulfilling. Despite the ticking clock, nearly three-quarters of respondents do not expect to apply for authorisation this year. Perhaps this is understandable given the changes required and the potential impacts on current business models.
Only half the respondents indicated they were going to make all their existing funds compliant. Over 30% suggested they would close funds, merge funds or convert them to Ucits. This suggests the directive is causing some firms to re-examine their business models and take different approaches for different funds. The survey also suggests some clients are still deciding on their course of action. This, combined with some of the uncertainties expressed around the directive, make it unsurprising that the majority of clients are looking at 2014 to register as an alternative investment fund manager (AIFM). It also suggests there may be further consolidation and aggregation of funds in Europe, leading to larger funds and potentially lower total expenses ratios (TERs) in the long term. This is one of the objectives called out by the European Commission in terms of Ucits funds and perhaps this is a broader trend we will see in the coming years looking forward to Ucits V and VI.
However, with such a large proportion of the industry planning for registration and compliance in 2014, is there a risk of bottlenecks delaying compliance? Compliance requires support and engagement from many participants, legal, advisory, depositary, administrations, regulators, boards, and others. The first half of 2014 will be a busy and tense time for all involved. The consequences of non-compliance, post the July 2014 cut off, remain unclear.
There are a handful of early adopters, indicated by our survey. These companies tell us that they are seeking to gain advantage as first movers to gain positive investor perceptions, spurred on by the potential to access greater investor capital as they leverage the passport opportunities for cross-border European distribution.
With AIFMD often cited as the prequel to greater regulatory requirements in the form of Ucits V, we expect underlying investors, such as pension funds, to use AIFMD compliance as a standard which they will expect as part of their due diligence before committing to investments.
It is the investors that are expected to be the main beneficiaries of the AIFMD. In the survey, 29% of respondents said they expected investors to benefit. The ability to distribute funds more broadly was also called out as a benefit by 29% of companies and regulators were assumed to be a beneficiary by 25%. It is also interesting to note that a quarter of the companies felt competitors not impacted by the AIFMD would benefit, effectively at the expense of AIFMs and this fear is potentially mirrored in the fact that only 14% of respondents felt there was a benefit for the fund and 7% for the fund manager.
Overall, 18% of respondents said they felt the AIFMD would bring benefits in the medium term. Fifty per cent felt their organisation would be slightly or very disadvantaged in the medium term.
Managers are bracing themselves for the cost of compliance and just as the state of readiness varies across the board, so does the cost. Project and one-off costs are expected by the industry, but this is just the tip of the iceberg in terms of resourcing the on-going requirements of compliance. Regulatory reporting, risk and compliance reporting and the cost of depositary services are all on-going costs to be incurred by funds and fund managers. These costs are in many cases going to be passed on to the investor, with 88% of respondents in our survey expecting an increase in the TERs of their funds.
In addition to increased costs, respondents suggest the AIFMD will result in less choice for the investor because there will be fewer funds on the market. As mentioned, companies will be closing and merging funds as a consequence of the AIFMD. Certain funds may become too costly to pursue under the AIFMD, particularly those with complex investments, high turnover and volatility, such as emerging market strategies, which also carry a higher depositary cost. Instead, more basic long-only or long-short strategies may become a cheaper option requiring less operational structure.
Some companies (7%) suggested they would move funds out of the EU. Moving off-shore may provide some respite or a potential delaying tactic but will not necessarily provide a successful means of permanent avoidance. The rules for private placement are subject to review and non-EU markets may introduce their own “equivalent” rules to gain access to the EU passport.
There are other potential challenges that may arise from the AIFMD and in the long term there may be benefits that are not yet identified. For example, the directive requires a greater degree of information sharing between agents of the fund. In the short term this may represent a cost but in the longer term this may mean companies are able to deliver transparency more effectively. We expect data to become the prime currency across the whole value chain. We believe the provision of data will provide the impetus for increased rationalisation and centralisation of structures, as the market drives towards efficiency.
Hani Kablawi is Emea head of Asset Servicing at BNY Mellon
©2013 funds europe